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Bill Tribe, Ph.D., Partner, A.T. Kearney
E-mail: bill.tribe@atkearney.com – Phone: +1 847 422 3930
June 15, 2016
Opening Keynote Address
Orthopaedic Device Industry Business
Models: 2020 and Beyond
OMTEC Keynote
■ Industry / Sector Specific Challenges
■ Potential Responses
■ Q&A
Industry / Sector
Specific Challenges
0%
5%
10%
15%
20%
25%
30%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Disruptive change is just beginning – eroding 5% of
margin if left unaddressed
Actual Forecast
Global Medical Device Margin Trend
(USD, as % of Sales)
-5%
+2% -1%
$34B value at stake
Source: A.T. Kearney
Volumes and overall market size are projected to
continue growing for orthopaedics …
Source: ORTHOWORLD, A.T. Kearney
Global Orthopaedics Revenue
($M)
0
10,000
20,000
30,000
40,000
50,000
60,000
1 2 3 4 5 6 7 8 9 10
2.5%
2.0%
… but prices and margins will continue to face strong
downward pressures in U.S. and abroad
Source: Deutsche Bank, A.T. Kearney
-3%
-2%
-1%
0%
1%
201420132005 2006 2007 2008 2009 20112010 2012
U.S. Joint Reconstructive Pricing
(Estimated % Change Year-over-Year)
Interviews coupled with our research and experience
suggest five combined forces are likely to disrupt
orthopaedics
Source: A.T. Kearney
The confluence of these disruptors is forcing unattractive
economics on the traditional orthopaedics business model
Orthopaedics market is already experiencing the
power shift among the value chain players
Source: A.T. Kearney
Power shift to players and providers
Before
Fee-for-service,
specialized
care
After
ACO/IDN, coordinated
care, increased quality
and transparency,
narrower product choice
Before
Negotiated
contract rate,
risk mitigation
After
Merging for scale,
pay for performance,
real world evidence
Provider
Payer
Source: A.T. Kearney
Regulators have focused on orthopaedics for the last
few years and that has driven increasing burdens
Heightened regulatory scrutiny
Orthobiologics UDI Sterilization Instruments
2007
FDA Amendments
Act
2010 - 2011
510K Revisions
2012
FDASIA:
MDUFMA
revisions
2013
Medical device
excise tax
2007
FDA ordered to
implement UDI
2011
Class 1lb
classification
created
2012
Registration
requirements change
2015
CMS voices
concerns about UDI
20102008 20142009 20152013201220112007
US VC Medical Device Companies (% of total VC)
Innovation in the sector has slowed down and funding
is becoming more challenging
Unclear sources of innovation
2015 (1H)
6
2013
7
2012
10
2009
15
0
5
10
2004 2006 2008 2010 2012 2014
-8%
Orthopaedics PMA (#)
0
50
100
150
2004 2006 2008 2010 2012 2014
+11%
Orthopaedics sPMA (#)
Source: A.T. Kearney
Healthcare models emphasize outcomes and bundled
solutions with a clear focus on reducing procedure
overall costs
Source: CMS, A.T. Kearney
Example: Hip Replacement Value Breakdown
New healthcare delivery models
Bundled payments (CJR) Healthcare systems
Represents only
3% of total cost
Cost of implant &
equipment
Cost of operation
(hospital based)
Post op care
(hospital based)
Post discharge
(short term)
Post discharge
(long term)
3% 22% 29% 19% 27%
3% 25% 54% 73% 100%
Coverage, affordability & accessibility will drive growth
in underserved segments of developed markets
Source: A.T. Kearney
US Healthcare Spend vs. Insurance Coverage by State
‘000$/capitaperstate
Need to serve lower socio-economic classes
Multi-tiered product portfolios Differentiated market access models
80% 85% 90% 95%
$0
100%
$6
$8
$10
$12
0%
DE
LA
MA
MI
MT
NV
RI
UT
VT
VA
AK
AZ
CO
CT
DC
Private or Public Insurance (% of population)
IA
FL
GA
HI
ID
WV
$6B potential
Potential
Responses
Hospitals: 3-5%
Majors: 1-2%
CMOs: 5-10%
Majors: 20-30%
Challengers: 10-15%
OEMs
Suppliers /
CMOs
Distributors
Payers &
Providers
1. Distributors: based on Cardinal Health, McKesson & ABC; OEMs: majors based on Zimmer Biomet, Stryker, Smith & Nephew, challengers based on Nuvasive, Amplitude and Exactech;
Hospitals based on American Hospital Association and Kaiser Permanente; CMOs based on Greatbatch, Symmetry and estimates for private players
0%
10%
20%
30%
Current orthopaedics value chain margins are
concentrated on OEMs but that will be increasingly
challenged
OEMs are increasingly challenging traditional models to
deliver a differentiated customer experience …
Source: WSJ.com, Company News, A.T. Kearney
Distinct Customer Experience Concepts
Select Examples
Post-op
CareLink Network
Less return visits
and proactive
issue identification
Center for
Advanced
Recovery™ (CARE)
In-decision
ExamplesValue
Commitment to
patient-centric
care
Surgery
Destination Centers
for Superior
Performance
Streamlined end-
to-end patient
journey
Manufacturers
Customized
Implants and Rep-
less Models
Pre-op
Simplified steps
and surgical
environment
… with personalized surgery and implants becoming
more relevant in their value proposition
Personalized Orthopaedics
Select Examples
Manufacturers
Source: Stryker, Zimmer Biomet, A.T. Kearney
Robotic
Personalized Surgery
Personalized
Implant Systems
At the same time, distributors are moving upstream in
the chain and offering new delivery models
Distributors Business Models
Select Examples
Direct-to-patient /
hospital distribution
Distributors
Source: Cardinal Health, Millstone, A.T. Kearney
Expansion into
orthopaedics
Payers & Providers Initiatives
For payers and providers, partnerships with OEMs and
bundled payment models are rapidly expanding
Select Examples
Source: Zimmer Biomet, HBR, Hoag Orthopedic Institute, A.T. Kearney
Payers & Providers
Bundled payments for
commercial insurers
OEM – clinic holistic
partnership
Winning orthopaedics business models will leverage an
end-to-end perspective and interactions across the
value chain
OEM
Manufacturers
Suppliers / CMOs Distributors
Payers &
Providers
How do portfolio choices help
manage supplier relationships?
How can you define differentiated supply chains to
serve different markets & segments effectively?
How can you enhance end-to-end cost efficiencies?
What drives a more scalable & efficient supply base?
What upstream relationships
can create the most value?
What services truly enhance your products and the ability to provide
value?
How can bundling
be managed?
Restructuring already underway in adjacent sectors
Current M&A activity just scratching the surface
Big names will disappear
New and unexpected ones will emerge
Multi-billion $$ value at stake
Are you equipped for the future?
The change has begun, and the winners will address the
challenges early…
This document is exclusively intended for select audiences. Distribution,
quotations, duplication, and excerpts are not permitted without
A.T. Kearney’s prior written consent. The content compiled in this report is for
presentation only and does not represent the complete findings or total
documentation on the topic represented.
Americas Atlanta
Bogotá
Boston
Calgary
Chicago
Dallas
Detroit
Houston
Mexico City
New York
Palo Alto
San Francisco
São Paulo
Toronto
Washington, D.C.
Asia Pacific Bangkok
Beijing
Hong Kong
Jakarta
Kuala Lumpur
Melbourne
Mumbai
New Delhi
Seoul
Shanghai
Singapore
Sydney
Taipei
Tokyo
Europe Amsterdam
Berlin
Brussels
Bucharest
Budapest
Copenhagen
Düsseldorf
Frankfurt
Helsinki
Istanbul
Kiev
Lisbon
Ljubljana
London
Madrid
Milan
Moscow
Munich
Oslo
Paris
Prague
Rome
Stockholm
Stuttgart
Vienna
Warsaw
Zurich
Middle East
and Africa
Abu Dhabi
Doha
Dubai
Johannesburg
Manama
Riyadh
A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since
1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned
firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-
critical issues. For more information, visit www.atkearney.com.
Orthopaedic Device Industry Business Models: 2020 and Beyond

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Orthopaedic Device Industry Business Models: 2020 and Beyond

  • 1.
  • 2. Bill Tribe, Ph.D., Partner, A.T. Kearney E-mail: bill.tribe@atkearney.com – Phone: +1 847 422 3930 June 15, 2016 Opening Keynote Address Orthopaedic Device Industry Business Models: 2020 and Beyond
  • 3. OMTEC Keynote ■ Industry / Sector Specific Challenges ■ Potential Responses ■ Q&A
  • 5. 0% 5% 10% 15% 20% 25% 30% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Disruptive change is just beginning – eroding 5% of margin if left unaddressed Actual Forecast Global Medical Device Margin Trend (USD, as % of Sales) -5% +2% -1% $34B value at stake Source: A.T. Kearney
  • 6. Volumes and overall market size are projected to continue growing for orthopaedics … Source: ORTHOWORLD, A.T. Kearney Global Orthopaedics Revenue ($M) 0 10,000 20,000 30,000 40,000 50,000 60,000 1 2 3 4 5 6 7 8 9 10 2.5% 2.0%
  • 7. … but prices and margins will continue to face strong downward pressures in U.S. and abroad Source: Deutsche Bank, A.T. Kearney -3% -2% -1% 0% 1% 201420132005 2006 2007 2008 2009 20112010 2012 U.S. Joint Reconstructive Pricing (Estimated % Change Year-over-Year)
  • 8. Interviews coupled with our research and experience suggest five combined forces are likely to disrupt orthopaedics Source: A.T. Kearney The confluence of these disruptors is forcing unattractive economics on the traditional orthopaedics business model
  • 9. Orthopaedics market is already experiencing the power shift among the value chain players Source: A.T. Kearney Power shift to players and providers Before Fee-for-service, specialized care After ACO/IDN, coordinated care, increased quality and transparency, narrower product choice Before Negotiated contract rate, risk mitigation After Merging for scale, pay for performance, real world evidence Provider Payer
  • 10. Source: A.T. Kearney Regulators have focused on orthopaedics for the last few years and that has driven increasing burdens Heightened regulatory scrutiny Orthobiologics UDI Sterilization Instruments 2007 FDA Amendments Act 2010 - 2011 510K Revisions 2012 FDASIA: MDUFMA revisions 2013 Medical device excise tax 2007 FDA ordered to implement UDI 2011 Class 1lb classification created 2012 Registration requirements change 2015 CMS voices concerns about UDI 20102008 20142009 20152013201220112007
  • 11. US VC Medical Device Companies (% of total VC) Innovation in the sector has slowed down and funding is becoming more challenging Unclear sources of innovation 2015 (1H) 6 2013 7 2012 10 2009 15 0 5 10 2004 2006 2008 2010 2012 2014 -8% Orthopaedics PMA (#) 0 50 100 150 2004 2006 2008 2010 2012 2014 +11% Orthopaedics sPMA (#) Source: A.T. Kearney
  • 12. Healthcare models emphasize outcomes and bundled solutions with a clear focus on reducing procedure overall costs Source: CMS, A.T. Kearney Example: Hip Replacement Value Breakdown New healthcare delivery models Bundled payments (CJR) Healthcare systems Represents only 3% of total cost Cost of implant & equipment Cost of operation (hospital based) Post op care (hospital based) Post discharge (short term) Post discharge (long term) 3% 22% 29% 19% 27% 3% 25% 54% 73% 100%
  • 13. Coverage, affordability & accessibility will drive growth in underserved segments of developed markets Source: A.T. Kearney US Healthcare Spend vs. Insurance Coverage by State ‘000$/capitaperstate Need to serve lower socio-economic classes Multi-tiered product portfolios Differentiated market access models 80% 85% 90% 95% $0 100% $6 $8 $10 $12 0% DE LA MA MI MT NV RI UT VT VA AK AZ CO CT DC Private or Public Insurance (% of population) IA FL GA HI ID WV $6B potential
  • 15. Hospitals: 3-5% Majors: 1-2% CMOs: 5-10% Majors: 20-30% Challengers: 10-15% OEMs Suppliers / CMOs Distributors Payers & Providers 1. Distributors: based on Cardinal Health, McKesson & ABC; OEMs: majors based on Zimmer Biomet, Stryker, Smith & Nephew, challengers based on Nuvasive, Amplitude and Exactech; Hospitals based on American Hospital Association and Kaiser Permanente; CMOs based on Greatbatch, Symmetry and estimates for private players 0% 10% 20% 30% Current orthopaedics value chain margins are concentrated on OEMs but that will be increasingly challenged
  • 16. OEMs are increasingly challenging traditional models to deliver a differentiated customer experience … Source: WSJ.com, Company News, A.T. Kearney Distinct Customer Experience Concepts Select Examples Post-op CareLink Network Less return visits and proactive issue identification Center for Advanced Recovery™ (CARE) In-decision ExamplesValue Commitment to patient-centric care Surgery Destination Centers for Superior Performance Streamlined end- to-end patient journey Manufacturers Customized Implants and Rep- less Models Pre-op Simplified steps and surgical environment
  • 17. … with personalized surgery and implants becoming more relevant in their value proposition Personalized Orthopaedics Select Examples Manufacturers Source: Stryker, Zimmer Biomet, A.T. Kearney Robotic Personalized Surgery Personalized Implant Systems
  • 18. At the same time, distributors are moving upstream in the chain and offering new delivery models Distributors Business Models Select Examples Direct-to-patient / hospital distribution Distributors Source: Cardinal Health, Millstone, A.T. Kearney Expansion into orthopaedics
  • 19. Payers & Providers Initiatives For payers and providers, partnerships with OEMs and bundled payment models are rapidly expanding Select Examples Source: Zimmer Biomet, HBR, Hoag Orthopedic Institute, A.T. Kearney Payers & Providers Bundled payments for commercial insurers OEM – clinic holistic partnership
  • 20. Winning orthopaedics business models will leverage an end-to-end perspective and interactions across the value chain OEM Manufacturers Suppliers / CMOs Distributors Payers & Providers How do portfolio choices help manage supplier relationships? How can you define differentiated supply chains to serve different markets & segments effectively? How can you enhance end-to-end cost efficiencies? What drives a more scalable & efficient supply base? What upstream relationships can create the most value? What services truly enhance your products and the ability to provide value? How can bundling be managed?
  • 21. Restructuring already underway in adjacent sectors Current M&A activity just scratching the surface Big names will disappear New and unexpected ones will emerge Multi-billion $$ value at stake Are you equipped for the future? The change has begun, and the winners will address the challenges early…
  • 22.
  • 23. This document is exclusively intended for select audiences. Distribution, quotations, duplication, and excerpts are not permitted without A.T. Kearney’s prior written consent. The content compiled in this report is for presentation only and does not represent the complete findings or total documentation on the topic represented.
  • 24. Americas Atlanta Bogotá Boston Calgary Chicago Dallas Detroit Houston Mexico City New York Palo Alto San Francisco São Paulo Toronto Washington, D.C. Asia Pacific Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Taipei Tokyo Europe Amsterdam Berlin Brussels Bucharest Budapest Copenhagen Düsseldorf Frankfurt Helsinki Istanbul Kiev Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich Middle East and Africa Abu Dhabi Doha Dubai Johannesburg Manama Riyadh A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission- critical issues. For more information, visit www.atkearney.com.